BNP Paribas breaks cover as Europe’s best bet

BNPP’s latest strategic update for its corporate and institutional bank might have fallen short of the expectations of a market now used to the wild lurches of rival European firms, but to dismiss this as mere tinkering would be a mistake. It builds on an already bold and long-held plan. And, crucially, it is one the bank’s leaders say they can afford.

Barely five minutes after sitting down with Euromoney, Yann
Gérardin, head of corporate and institutional banking at
BNP Paribas, has to take a call on the retro Samsung mobile
phone his children like to make fun of. Jean-Laurent
Bonnafé, chief executive of the bank, wants to discuss
the approval of a big credit commitment to an important
client.

The interruption is instructive. This is a bank willing to
extend sizeable credit, but only if doing so fits in with its
vision for the entire firm. At BNPP, the idea of a standalone
corporate and investment bank strategy is anathema.

When Euromoney speaks to him, Gérardin has just come
through the full-year 2015 reporting cycle that has seen him
present the latest strategy for the CIB division, the 2016-2019
Transformation Plan, alongside the bank’s annual
results. Those results provided a strong backdrop: CIB revenues
rose 13.2% to €11.6 billion, with pre-tax profit up 17.9%
to €3.3 billion.

Gérardin told analysts on a February 5 conference
call that CIB now had "a solid and profitable platform ready to
act out of strength". It had improved its global position
thanks to gains in market share and had seen progress in the US
and Asia Pacific as well as reinforcing its European
franchises.

At group level, the bank has already surpassed its €3
billion revenue target for Asia Pacific one year ahead of the
schedule dictated by the current 2014-2016 plan.

The new plan builds on the previous one and on the new
governance structure that Gérardin put in place for CIB
in late 2014, when the division was renamed from corporate and
investment banking to corporate and institutional
banking.

It has its origins in an even earlier "adaptation plan" that
BNPP put in place in 2011 in the wake of the eurozone sovereign
debt crisis. That effort saw the bank slash risk-weighted
assets as it sought to achieve Basel III compliance quicker
than peers.

The flexibility now afforded the bank by those early moves
is a theme that Gérardin returns to frequently, both in
his comments to analysts and in his discussion with Euromoney.
For him, it has paved the way for all that has followed.

'Focus'

The first lever of the latest plan is dubbed 'focus', and is
intended to see capital and balance sheet shifted from
unproductive to productive areas, resulting in a trimming of
some businesses, geographical scope and clients in favour of
new opportunities principally created by the retreat of
struggling competitors.

Within this leg of the plan, risk-weighted assets are being
cut by €20 billion, with some €12 billion of that
coming from the wind-down of short-maturity legacy asset
securitization positions within global markets. A further
€8 billion is coming from the corporate loan book. This
will all be accompanied by a €10 billion reinvestment to
support the bank’s pursuit of market-share
gains.

The second lever, 'Improve’, targets some
€1 billion of cost savings by 2019, mostly through
improvements in operational efficiency. Finally,
'Grow’ will look to develop those businesses that
are less capital intensive than others and are strong fee
generators. These include the securities services, transaction
banking and cash management businesses that were brought into
the scope of CIB in 2014, as well as advisory.

Gérardin told analysts that success by 2019 would see
the CIB having grown revenues by at least 4% each year, while
reducing the cost-to-income ratio by eight points, generating
an additional €1.6 billion in pre-tax profit, compared
with 2015.

Not everyone shares his optimism that the targets can be
hit. But BNP Paribas has made a habit of meeting targets in
recent years in ways that many of its competitors might view
with jealousy.

At group level, the four targets it set as part of its 2014
to 2016 development plan have largely been hit already: revenue
growth up 10%; cost savings of €2.8 billion; return on
equity of at least 10%; and a fully loaded Basel III capital
ratio of 10%.

That’s perhaps why Bonnafé exudes a
quiet confidence when the doubts over the deliverability of the
CIB plan are put to him. And he is not one of the European bank
leaders, such as his close counterpart Frédéric
Oudéa at Société Générale,
Barclays chairman John McFarlane or Credit Suisse CEO Tidjane
Thiam, that have publicly bemoaned the increasing dominance of
US investment banks.

He shrugs when asked why that is, as if the question is
slightly redundant. After all, if US banks have increased
European market share in some areas, so has BNPP. According to
corporate banking and cash management studies by Greenwich
Associates in 2015, some 60% of European companies with at
least €2 billion in turnover use the bank for corporate
banking and 38% for cash management, results that the analysts
said put the bank "comfortably ahead" of competitors in both
businesses.

"We used to be a top-10 player in European cash management.
Now we are the top cash manager," says Bonnafé.
"It’s the same story in trade finance, factoring
and leasing. We’re confident we can continue to
gain market share through organic growth as set out in our
medium-term plan."

Trouble brewing

For Gérardin, the vision of how an investment
bank should be run stems from his experiences at the toughest
time in his career. He joined BNP in 1987 and, tucked away in a
corner of the dealing room, set about creating an equity
derivatives desk. By 1999, after the bank’s merger
with Paribas, he was global head of a growing business. By 2005
he was running all of the equities division too.

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